Sunk Costs – Do not Look at What You Have Spent, Look at What it Will Cost Later

by MHolland | Sep 6, 2024 | Business Tips

Sunk costs, like a sunk ship are better left on the shoals to rot…

Actually, a sunk ship is a good analogy for sunk costs.

Is it better to raise the ship and restore it or buy a new one?

A car analogy works great too. We all know how little it takes to wipe out a car, making it cheaper to buy a new car than repair even a mildly bashed one!

With your business, we forget this concept completely.

Even in our personal life, we ignore this distinction all the time.

A Personal Example

Recently my wife and I booked 5 nights at an Airbnb.

After 3 nights we wanted to get home for several reasons.

Did we lose 2 nights?

We paid for those 2 nights, right?

Even in my mind I think that I did!

Though, the logic is different.

If we stay the full 5 nights, we get what I paid for, yes? Yes, true.

However, we would spend a lot more eating out in those two days.

So, we will save the extra food money by going home early.

Even knowing that it occurs like we are losing by leaving early!

And then there is the subjective component of sunk costs.

The bed in the Airbnb was not that comfortable. We were not getting a good night sleep. There was street noise to deal with. It was a bit small.

You get the picture.

I share all this to demonstrate the powerful pull of how tenacious the sunk cost mindset is.

We are invested. We feel cheated if we do not get something back for what we invested.

Sunk Costs in Business

In business, it works the same way. I see it all the time. Our clients invest in a particular project, and they are all in.

Perhaps it is a marketing program. Could be a software development unique to their business.

They invest a lot of money.

They stop looking ahead at the future costs.

They are emotionally invested.

In fact, the more money sunk, the more attached they usually are.

Getting them to even think about letting it go is excruciating.

How To Evaluate a Project with a Lot of Sunk Costs

Start by looking at what your original intention was.

Why did you start this project initially? What was your intended outcome?

Now look – what is the project costing you now? List the actual dollars plus the frustration of missed deadlines, missed outcomes, and false starts.

Next, ask these questions:

1. What will it cost to complete the project?
2. What are the emotional costs for you and your Team from missed deadlines and broken promises?
3. Can you complete it in a reasonable time frame?

And the kicker question is this – is there a cheaper, better alternative?

An Example in Business

I remember a client we engaged many moons ago who had invested over $100,000 in a software program for manufacturers.

Promises were broken.

Modules were dysfunctional.

The owner of the company was now at a decision point – walk away from an over $100,000 investment or keep going?

We presented him with a much less expensive, tried, and true software solution.

It took courage, and he walked.

Back to my Airbnb story…

We left those 2 Airbnb nights as a gift to the owner. We saved money on food, slept better, and were happy to get home!

Thanks for reading…

Culture Eats Strategy For Breakfast

by MHolland | Aug 14, 2024 | Business Tips

What is strategy?

“A plan of action resulting from strategy or intended to accomplish a specific goal”.

What is culture?

“The set of predominating attitudes and behavior that characterize a group or organization”.

Can you see right there in those definitions how culture would eat strategy for breakfast?

Let us go deeper into this…

A good strategy will empower a great culture to perform remarkably well.

By the way, like ideas, there is no such thing as a good strategy.

A strategy is good only in hindsight, only if it accomplished the intended outcome.

A strategy is only as good as the outcomes it produces.

How can anyone know if it is good or not?

After you have created some momentum with your strategy. Only then can you pause, and say, “yes, this is a good strategy”.

A Bad Culture Kills A Good Strategy

A good culture lifts a good strategy to the heavens. In fact, good culture is so powerful it can even make a bad strategy work.

Culture is the DNA of your organization. You can only see it in the behavior of your people. It is embedded in the things they do when no one is looking.

Like a marriage or friendship, It takes a long time to build, and in a careless action a short time to destroy.

Because it is invisible it is the hardest thing to change.

You may think you have a great business building strategy.

A bad culture (i.e. a poor performing, or toxic culture) will sabotage strategy every time.

Then, bad managers will often use fear (out of frustration with poor performance), crack the whip, and drive down the strategy road even harder and faster….

…and over the cliff.

It is harder, and in the long-term more productive to work on building an awesome culture.

How is this done effectively?

How You Treat Your Team Is How They Will Treat Your Clients/Customers

Want an awesome client culture?

Treat your Team as your clients.

Nurture them.

(Of course, screen for attitude in your hiring process).

You, as owner/CEO, are not in the top of the food chain. You are underneath your Team, supporting them, giving them the tools they need to perform.

Be THE Example

Walk the talk.

Walk the talk.

Walk the talk.

This cannot be repeated enough. If you treat your employees/Team with disrespect, mockery, or you gossip behind their back, then expect a stinky culture to emerge from you and around you.

You are the source of the culture. Take it seriously.

Your Team will follow what you do, not what you say.

Create Performance Standards

Establish awesome service Performance Standards for your company that are based in reality.

By “based in reality” I mean they are measurable in reality.

Here is an example of what I mean:

One of our telephone Performance Standards is:

“Answer the phone on the second ring”.

This is easily observable in reality. It is either done, or not done. It is not a motherhood statement or opinion.

Create Your Cultural Values and Express Them As Actions

Choose 4-6 values that embody the best of your culture.

Turn them into verbs.

Here is an example:

“We do excellent work, virtually invisible to our clients freeing them to concentrate on growing their business”.

The verb is “do”. The outcome is “clients concentrating on growing their business”, without being distracted by the work of bookkeeping and accounting, which most business owners hate.

If I stated our value as “excellence” it means nothing until fleshed out into an action statement.

Be Consistent

Be so fanatical about your culture that you refuse to compromise it.

Apologize for anything that veers your culture off course.

Live your values, and standards every day, all day. Even on a bad day.

Never take your temper out on your Team.

The Power of Culture Over Time

Once you have created, nurtured, fed, and grown your corporate culture now you have the opportunity for performance.

Notice I said, “opportunity for performance”, not guaranteed performance.

Now strategy can help.

It is the rudder on your ship. Culture IS the ship.

Without culture you have no ship to steer.

Thanks for reading…

The Fulfillment Curve – How Much is Enough?

by MHolland | Aug 8, 2024 | Business Tips

I wrote the following Blog a few years ago and updated it slightly…enjoy!

How much is enough? It is a question we can all ask ourselves, especially when it comes to consumption. The greatest joy in life comes from creating versus consuming.

When we are creating, we are most fulfilled. Whereas consuming is like any addiction – we get a momentary shot of pleasure, followed by a crash, followed by the desire for more, followed by a crash, followed by a gripping addiction…

The beautiful thing is that creating is always available to us. We can create from nothing, or very little.

A Little Boy’s Toy

I remember about 5 years ago we saw a little child in Kenya playing on a dirt road with what I thought was a pull toy (perhaps a discarded Mattel toy from the West). As I got closer, I could see that it was a little truck, and on closer glance that it was entirely handmade!

The body was cut out from a plastic bleach bottle, the axles were re-fashioned from a coat hanger, the wheels were bottle caps, there was a pole and on it little fruits he attached, stones were inside, and he was pulling it with a discarded nylon!

He was so – rightly – proud of what he had built.

I would assert that this boy was much happier, more fulfilled, than a child who just receives a toy, plays with it for a while and then in boredom wants another.

The Fulfillment Curve

Joe Dominguez who co-wrote a book called, “Your Money or Your Life” was a New York financier who became very unhappy living inside the consumption cycle of work hard, spend, and then work harder for more.

He gave it all up to learn how to live on less and be happier.

A Chart in his book really changed my life, and I never forgot it.

On the vertical axis is “fulfillment”, on the horizontal axis is “money spent”. Initially, as you can see from the steep upward curve that there is a lot of fulfillment up to “survival”, and it continues up further to “comforts”.

So, what is this telling us?

It is telling us that if we are starving, with nothing to eat and no shelter, the money we spend on basics really does fulfill us. We need to eat, and we need clothing and shelter, clearly.

The curve starts to taper off – slightly – as we gain some comforts. So, fulfillment is continuing to rise. This may come from having, say a car, or a coffee machine.

To test this, go back in your mind to when you had your very first apartment, maybe out of high school, or after College. It may have been a studio or small 1 bedroom, yet, it was your very own, and it felt great!

Or how about your first old beater when you were 17!

Fulfilling, wasn’t it?

When the Curve Tips to The Other Side

Take a look at the Fulfillment Chart and see how it starts to go down.

What is causing this?

It is happening because – for all of us – at some point, the next purchase brings less fulfillment.

How is that possible?

It goes something like this…

You are living a comfortable life, you have a family, a good business, and all your family’s needs are taken care of. You can send your kids to the best schools and so on.

Then, you decide to buy a bigger, fancier house. You sell your lovely, smaller home and take out a mortgage.

The mortgage is a monthly fixed expense and so you need more income, so you grow your business.

The economy is down and that is stressful, so you end up putting more hours in at work.

You see your family less, and even miss family dinners from working late.

You get the idea…

The Money Workshop Exercise

In a Money Workshop we created 14 years ago we designed an exercise (I have written about this before) that had people go out as a group with a very small amount of money and make sure everyone got fed well.

The creativity of the different groups was mind-blowing. One group convinced a restaurant manager to clear dishes from the tables and they got so much free food they had to box it up and gave the excess to street people.

They were bubbling over with joy when they returned to the workshop after lunch!

They got to experience – to their very bones – the difference between consuming and creating, and also, how little it takes to fulfill us.

The Millionaire Who Lost It All and Then Gained It All

I read a story years ago about a man – a Canadian – who lost it all. It was a public company and he was very rich. His entire personal fortune was, though, tied up in the shares of the public company. When the company tanked, he lost everything, even his principle residence.

So, what did he do?

He was quite a bit older (early 70s as I remember).

He started a small business at home in wood working and furniture building.

What I always remember from the article I read about him was that getting a $5,000 contract to build a beautiful piece of furniture gave as much, if not more, fulfillment and satisfaction than when he was a high roller, closing multi-million dollar contracts!

Hmmm, very interesting…

What Are Your Values?

We each must know what we value and move away from one of the biggest killers of creativity and fulfillment – comparison.

Comparing to our business associates and friends, who may have more, is what can drive many to fight to achieve more, in order to consume more.

And, for what?

So that you can feel like you are keeping up?

How really fulfilling is that?

Thanks for reading…